Difference Between Start-up & Business: All you Need to Know A critical difference between the two is found in two financial principles - risk vs return and the going concern concept
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We tend to typecast people, might be because it makes it easier for us to identify with them and develop our likes/dislikes towards them (a pitfall, but that is not the focus of this article).
So here is my contribution towards group-think – a start-up enthusiast is usually an unkempt (!), unsure & nerdy person, who is bored with the run-of-the-mill worldly situation & is looking for inner peace by solving issues through novel ways. A businessman on the other hand is well-dressed (almost overboard), confident and driven by a strong sense of profit-making & account-keeping. For the sake of this article, let us call the business man, Rahul and the start-up enthusiast, Nita**.
Different Business Models
Now let's say both wanted to sell jewellery. Rahul would ideally set up a shop/showroom on the main road with inventory being key to both his profit-making & customer traction.
Usually his sales are immediate; he relies on trust, goodwill & word-of-mouth for the sales and the principles of a free market determine the prices and the profit-making.
How will Nita look at the same problem — she would look at how the sales can occur online while using machine learning to sell customized solutions based on demographics, preferences of the customer including budget, allergies, use of new metals & stones. Nita would not be able to achieve this on day one &she creates a viable product that can test her hypothesis. The hypothesis being the willingness of customers to use algorithms to determine jewelry designs that would suit their physical appearance &preferences. She does all this from the comforts of her home & gets family members, friends & friends of friends to be part of the experiment.
When Rahul sets out on the business establishment journey, the capital is usually within the family &he has support among his kith& kin to undertake a rather capital-intensive mission. This capital can be in form of loans procured within a support system. Nita, who is bored with her MNC job, has some savings & sells her brilliant idea (she strongly believes so) to her cousins, colleagues & even her boss with hope that they will participate in this round of funds to pedal the first part of her adventure.
Contrasting Reasons to Embark on Journey
The critical differentiation between a start-up & a business is the reason each is started.Nita, as mentioned, is disgruntled with how things happen today & believes there can be smarter, faster & efficient ways of solving the problem. Rahul on the on other hand, wants a handsome profit coming on a monthly basis while he infuses part of the profitsto grow the business over time.
He is clear that his scale is limited by capital infusion. Let us not discount that he has modern ways of carrying out a traditional business – he uses latest accounting tools, has RFID tags & has exotic pieces from around the world showcased in his showroom.
He is driven by customer-feedback principles, uses modern financial payment methods & even analyses customer data to increase his profits/revenues. But he is driven by a sense of profits & solving today's needs of the customers. Nita on the other hand is scorning at the inefficiencies in the market; worried why technology has not been used to make humans lazier & solve the specific issue she faced or witnessed others go through.
Another critical difference between the two is found in two financial principles – risk vs return and the going concern concept. Let us look at the latter first.
Most businesses are considered to be a going concern – in the sense that they function without a threat of liquidation for the foreseeable future (more than 12 months).
A start-up is mostly never in such a comfort zone, unless the entrepreneur has a deep pockets godfather. But the risk vs return concept drives home the difference most profoundly. Rahul is taking a risk by not putting the capital in bonds/fixed deposits, but he is pretty confident of the success of the business.
He is not sure of the exact profits, growth year-on-year & sales. But he is fairly comfortable that he will be operationally profitable. Nita on the other hand does not even know if after six months, she might be calling her boss to see if there is a vacancy in the same irksome MNC.
Let us face it, arguably 90% of startups fail (based on definition of both failure & startups). It is not to say that business do not fail, they do. But they usually wrap up gradually & get signals of their decline. Reasons for startups to fail can range from appalling to stupendously hilarious.
A start-up Bubble?
In today's YC age & the start-up India bandwagon, it is chic to be a startup. But this is the main reason behind this piece – not every journey an entrepreneur embarks on is a startup! Venture capitalists, angels, incubators, media & educational institutions are all to be blamed for what is a startup bubble – any business seems to be a startup. If you as an entrepreneur are not confident of showing a hockey-stick growth or solving an essential customer-paying problem that will continue to exist in some form in the future, you might be better off calling yourself a businessman.
Let us take example of Rahul – unless he changes the risk he embraces, solves a problem in a scalable manner & is not sure of what will happen after a year – he is quintessentially a dhandawala (businessman).